[Federal Register Volume 61, Number 70 (Wednesday, April 10, 1996)]
[Notices]
[Pages 15975-15983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8841]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 96-23; Application Number D-09602]
Class Exemption for Plan Asset Transactions Determined by In-
House Asset Managers
Agency: Pension and Welfare Benefits Administration, Labor.
Action: Grant of class exemption.
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SUMMARY: This document contains a final exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed
by the Internal Revenue Code of 1986 (the Code). The exemption permits
various transactions involving employee benefit plans whose assets are
managed by in-house managers (INHAMS), provided that the conditions of
the exemption are met. The
[[Page 15976]]
exemption affects participants and beneficiaries of employee benefit
plans, the sponsoring employers of such plans, INHAMS, and other
persons engaging in the described transactions.
EFFECTIVE DATE: The effective date of the exemption is April 10, 1996.
FOR FURTHER INFORMATION CONTACT: Lyssa Hall or Virginia J. Miller,
Pension and Welfare Benefits Administration, Office of Exemption
Determinations, U.S. Department of Labor, Washington, DC 20210, (202)
219-8971 (not a toll-free number) or Paul D. Mannina, Plan Benefits
Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-
free number).
SUPPLEMENTARY INFORMATION: Exemptive relief for the transactions
described herein was requested in an application dated December 16,
1993 submitted by the Committee on Investment of Employee Benefit
Assets (CIEBA), pursuant to section 408(a) of ERISA and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR section 2570 subpart B (55 FR 32836 August 10, 1990).
On March 24, 1995, the Department published a notice in the Federal
Register (60 FR 15597) of the pendency of a proposed class exemption
from certain of the restrictions of sections 406 and 407(a) of ERISA
and from certain taxes imposed by section 4975(a) and (b) of the Code,
by reason of section 4975(c)(1) of the Code.1
\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978), effective December 31, 1978 (44 F.R. 1063,
January 3, 1978), generally transferred the authority of the
Secretary of the Treasury to issue exemptions under section
4975(c)(2) of the Code to the Secretary of Labor. In the discussion
of the exemption, references to sections 406 and 408 of the Act
should be read to refer as well to the corresponding provisions of
section 4975 of the Code.
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The notice gave interested persons an opportunity to submit written
comments or requests for a hearing on the proposed class exemption to
the Department. The Department received fourteen written comments and
no requests for a public hearing. Upon consideration of all of the
comments received, the Department has determined to grant the proposed
class exemption, subject to certain modifications. These modifications
and the major comments are discussed below.
Discussion of the Comments
A. Basic Exemption
1. INHAM as Decision Maker (Section I(a)). The proposed general
exemption, set forth in Part I, permitted that portion of a plan that
is managed by an INHAM to engage in all transactions described in
section 406(a)(1)(A) through (D) with virtually all party in interest
service providers except the INHAM or a person related to the INHAM.
Under section I(a) of the proposed exemption, the INHAM must function
as the decision maker for the plan in all covered transactions.
Specifically, section I(a) requires that the terms of the transaction
be negotiated by, or under the authority and general direction of, the
INHAM and that the INHAM make the decision to enter into the
transaction.
Under section I(a) of the proposal, the exemption would be
available for a transaction involving an amount in excess of $5,000,000
notwithstanding the fact that the transaction that had been negotiated
by the INHAM was subject to a veto or approval by the plan sponsor. A
commenter suggested that section I(a) should be modified to permit the
plan sponsor or its designee to retain the right to veto or approve any
transaction, regardless of the size of the transaction. Although the
exemption permits the retention of a veto power for large transactions,
the exemption was developed based on the premise that independent
decisionmaking was more likely to be assured if day to day transactions
are negotiated and approved by an INHAM. Therefore, the Department has
determined not to adopt the commenter's suggestion.
A commenter is concerned that the requirement under section I(a) of
the proposal that the INHAM negotiate and make the decision on behalf
of the plan to enter into the transaction may foreclose a transaction
where an INHAM retains a QPAM to locate and negotiate the terms of a
possible plan investment. According to the commenter, it is frequently
advantageous for a plan to retain a QPAM to identify investment
opportunities and to negotiate the terms of these types of investments,
while permitting the INHAM to perform its own ``due diligence'' review
of each investment opportunity presented and evaluate the
appropriateness of the investment for the plan's particular investment
needs. The Department does not believe that it would be appropriate in
the context of this exemption proceeding to modify the INHAM exemption
to, in effect, permit a transaction that was previously rejected by the
Department during its consideration of the final QPAM class
exemption.2
2 In this regard, see PTE 84-14, 49 FR 9497 (March 13, 1984).
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A commenter questioned whether Part I of the exemption would apply
to ``drag along'' and similar transactions that are not actually
negotiated by the INHAM. According to the commenter, when a plan makes
an investment in a non-publicly traded entity, both the plan and other
investors want to be able to dispose of their investment at a favorable
price. In order to accomplish this objective, plans and other investors
may negotiate certain rights at the time they make their initial
investments. One such right would be the ability of the plan to ``tag
along'' and sell out its interest at the same price as the majority
investors if the majority investors sell their interests to a third
party. The converse of this right would be the ability of the majority
investors to ``drag along'' the plan if they sell their interest to a
third party. When these rights are exercised, it may turn out that the
party to whom the interests are sold is a party in interest. The
commenter argues that the ``drag along'' or similar transactions should
be treated as subordinate to the initial investment transaction and,
therefore, subject to the authority or general direction of the INHAM
for purposes of section I(a) of the exemption. The commenter represents
that, while the INHAM is not involved in selecting the party to whom
the plan's interest is sold, the transaction is determined by an
independent party pursuant to rights negotiated by the INHAM at arm's-
length at the outset of the investment transaction. The commenter
further represents that these rights would be taken into account by the
INHAM in determining whether the initial investment would be prudent.
It is the view of the Department that section I(a) of the exemption
will be deemed satisfied in the case of ``drag along'' or similar
transactions that are entered into pursuant to rights that were
negotiated by the INHAM as part of the primary investment transaction.
The Department notes, however, that it does not interpret section I(a)
as exempting a ``drag along'' or similar transaction unless such
transaction is itself subject to relief under the exemption and the
applicable conditions are otherwise met. In this regard, the Department
expects that any determination regarding the appropriate price to be
paid for the investment would reflect the effect on the value of such
investment of rights which may be exercised in the future at the
discretion of unrelated third persons.
One commenter requested that the Department clarify that the
requirements of section I(a) would be met if an officer of the INHAM
also serves as a member of the employer's investment committee or other
named fiduciary under the plan. Nothing contained in section I(a) would
preclude
[[Page 15977]]
an officer of the INHAM from also serving as a member of the employer's
investment committee or other named fiduciary under the plan, provided
that the INHAM otherwise meets the definition set forth in section
IV(a), including the requirement that the INHAM must be a separate
entity that is registered as an investment adviser.
A commenter requested that the Department clarify that the
requirements of section I(a) will be satisfied notwithstanding the fact
that the INHAM also manages assets of outside clients.
In the Department's view, nothing contained in the exemption would
preclude the INHAM from providing services to outside clients who have
no affiliation with the INHAM.
In response to a comment regarding typical investment increments
used in financial transactions, the Department has revised section I(a)
by replacing ``an amount in excess of $5,000,000'' to ``$5,000,000 or
more'' in connection with the plan sponsor's right to veto or approve
such transactions.
2. Transactions Involving Arrangements Designed to Benefit Parties
in Interest (Section I(c)). Section I(c) of the proposal requires that
the transaction not be part of an agreement, arrangement or
understanding designed to benefit a party in interest. A commenter
suggested that the Department clarify that to the extent that the
INHAM's purpose in entering into a transaction is not to benefit a
party in interest, so that any benefit to the party in interest is
incidental to the purpose of the transaction, the transaction should
not give rise to an agreement, arrangement or understanding designed to
benefit a party in interest which is described in section I(c). The
Department concurs with the commenter and notes that the intent of the
condition in section I(c) was not to deny direct benefits to other
parties to a transaction but, rather, to exclude relief for
transactions that are part of a broader overall agreement, arrangement
or understanding designed to benefit parties in interest.
3. Transactions with Service Providers (Section I(e)). Under
section I(e) of the proposed exemption, relief was limited to
transactions with party in interest service providers who do not have
discretionary authority or control with respect to the assets involved
in the transaction or otherwise render investment advice with respect
to such assets. A commenter urged the Department to expand the scope of
the final exemption to include relief for all parties in interest. The
Department does not believe that a sufficient showing has been made
that the safeguards contained in the proposed exemption would
adequately discourage the exercise of undue influence upon the INHAM if
the final exemption were expanded as requested by the commenter.
Accordingly, the Department cannot conclude that further relief is
warranted.
Several commenters suggested that the Department clarify that
section I(e) of the proposal would not preclude a directed trustee of a
plan or a trustee with discretionary authority over plan assets not
involved in the transaction from engaging in transactions with the
plan. In the Department's view, a nondiscretionary trustee subject to
the direction of an INHAM, and that does not otherwise render
investment advice with respect to the plan assets involved in the
transaction may carry out proper directions that are not contrary to
ERISA with respect to the transactions covered by the class exemption.
Similarly, the exemption would be available for transactions with a
trustee that exercises investment discretion with respect to a portion
of plan assets not involved in the transaction.
Another commenter objected to the requirement in section I(e)(2)
that the party in interest dealing with the plan not have discretionary
authority or control with respect to the investment of the plan assets
involved in the transaction and not render investment advice (within
the meaning of 29 CFR 2510.3-21(c)) with respect to those assets.
According to the commenter, the first part of this condition regarding
discretionary authority or control is unnecessary in view of the
requirement under section I(a) that the terms of the transaction must
be negotiated by the INHAM, and that the INHAM make the decision on
behalf of the plan to enter into the transaction. The commenter further
believed that the requirement contained in section I(e)(2) that the
party in interest dealing with the plan not render ``investment
advice'' would create uncertainty and is unnecessary in view of the
limited scope of relief provided. Accordingly, the commenter requests
that the Department eliminate this requirement from the final
exemption.
This class exemption was developed, and is being granted by the
Department, based on the essential premise that broad exemptive relief
from the prohibitions of section 406(a) of ERISA can be afforded for
all types of service provider transactions in which a plan engages only
if the INHAM independently negotiates the transaction and makes the
decision on behalf of the plan to enter into the transaction. The
limitations contained in section I(e)(2) were included in the proposal
in order to further emphasize that the INHAM must be the decision-maker
in order for transactions to be covered by the class exemption. In
addition, the Department believes that, if exemptive relief were to be
provided where the party in interest renders investment advice to the
plan, with respect to the transaction at issue, the potential for
decision making with regard to the plan assets that would inure to the
benefit of a party in interest would be increased. For these reasons,
the Department believes that a separate condition is warranted and has
determined not to revise the exemption as requested by the commenter.
4. Fiduciary Audit (Section I(g)). Section I(g) of the proposed
exemption required that an independent auditor conduct an annual
fiduciary audit to determine whether the written procedures adopted by
the INHAM are designed to assure compliance with the conditions of the
exemption. Section IV(f) defined fiduciary audit as including: (1) a
determination by the auditor as to whether or not the plan has
developed adequate internal policies and procedures designed to assure
compliance with the terms of the exemption; (2) a test of a
representative sample of the plan's transactions to determine
operational compliance with such policies and procedures; (3) a
determination as to whether the INHAM meets the definition of INHAM set
forth in the exemption; and (4) a written report describing the steps
performed by the auditor during the course of its review and the
auditor's findings and recommendations.
Several commenters requested that the Department clarify the types
of ``policies and procedures'' that the INHAM is required to adopt for
purposes of sections I(g) and IV(f) of the proposal, and the criteria
the independent auditor should apply in conducting the audit. Another
commenter recommended that the audit be conducted in accordance with
standards established by the American Institute of Certified Public
Accountants (AICPA), and that the Department establish criteria against
which the independent auditor can make a determination that the
procedures are designed to operate in the manner contemplated by the
exemption. In this regard, a commenter raised a related question
concerning whether the proposed audit condition would require that the
policies and procedures include substantive criteria regarding expected
risk, gross return and expenses of a proposed transaction that the
INHAM should consider. One commenter
[[Page 15978]]
suggested that the scope of the audit should be expanded to include a
determination by the auditor regarding compliance with section 404(a)
of ERISA. Lastly, a commenter urged the Department to delete this
requirement entirely.
As noted in the preamble to the proposed exemption, the Department
proposed the audit requirement in order to address the lack of
independence of the INHAM. The Department continues to believe that an
annual fiduciary audit is necessary to address this lack of
independence and, accordingly, has determined not to delete this
requirement. In this regard, it was the Department's intent that the
role of the auditor would be limited to determining whether the written
procedures adopted by the INHAM are designed to assure compliance with
the conditions of the exemption. Since the sole purpose of the audit
requirement is to assure compliance with the exemption, the Department
does not believe that it would be appropriate to expand the scope of
this requirement to include either determinations under section 404 of
the Act or determinations regarding the appropriateness of investments
entered into under the exemption. In response to the comment concerning
the adoption of AICPA standards as part of the audit requirement, the
Department does not believe that it would be appropriate to adopt a
definition that would require compliance with standards developed by
certain professional organizations. However, in consideration of the
concerns expressed by the commenters, the Department has adopted a new
section I(g) which specifically requires that the INHAM adopt written
policies and procedures designed to assure compliance with the
conditions of the exemption. (The fiduciary audit requirement, set
forth in section I(g) of the proposal, has been renumbered as section
I(h) under the final exemption.) The Department has also adopted a new
definition, under section IV(g), that contains a list of the objective
requirements of the exemption that must be described in the written
policies and procedures and that must be reviewed by the auditor.3
In addition, the Department notes that, although the exemption provides
flexibility with respect to the specific procedures adopted by the
INHAM, it expects such procedures to be designed in a manner that
assures that the INHAM's operations are consistent with the
requirements of the exemption.
3 Although the Department has limited the auditor's
responsibilities under the final exemption to making findings on the
INHAM's compliance with the objective requirements of the exemption,
the INHAM remains responsible for assuring compliance with all of
the conditions of the exemption. Accordingly, the failure of the
INHAM to comply with a condition of the exemption not described in
section IV(g) would render the exemption unavailable.
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On a related issue, another commenter noted that the role of the
auditor under the exemption should be limited to determining compliance
with policies and procedures designed by the INHAM and should not
include a determination by the auditor as to whether the plan has
developed adequate policies and procedures as required under section
IV(f) of the proposal. According to the commenter, having the auditor
review the adequacy of the procedures would expand the auditor's role
beyond the typical role of an independent auditor. In response to the
commenter, the Department has determined to modify section IV(f) to
delete the requirement that the auditor make a determination regarding
the adequacy of the policies and procedures adopted by the INHAM. Under
the revised section IV(f)(1), the auditor would be required to review
the policies and procedures for consistency with the objective
requirements of the exemption. In light of the decision to revise
section (IV)(f)(1), the Department has also determined to expand
section IV(f)(2) to require the auditor to test for compliance with
both the written policies and procedures adopted by the INHAM and the
objective requirements of the exemption. In the Department's view, this
revised condition will help to assure that the INHAM properly carries
out its responsibilities under the exemption.
A commenter noted that the proposal did not make clear the
consequences on existing transactions of an unsatisfactory audit. In
response to the comment, the Department notes that an adverse finding
in the auditor's report would not, in itself, render the exemption
unavailable for any transaction engaged in by the INHAM on behalf of
the plan.4 However, if a transaction did not meet a condition of
the exemption (e.g., because relief was not available for transactions
with the party with whom the INHAM dealt), the exemption would not be
available for that transaction, but the exemption would continue to be
available for those transactions that did satisfy its conditions.
Conversely, a failure to comply with the general terms of the exemption
applicable to all transactions would render the exemption unavailable,
regardless of whether the failure is identified in the audit. Thus, if
the INHAM failed to adopt policies and procedures that complied with
the requirements of section I(g) or if no audit were conducted, the
exemption would not cover transactions engaged in on behalf of the plan
by the INHAM.
4 The Department cautions that the failure of the INHAM to
take appropriate steps to address any adverse findings in an
unsatisfactory audit would raise issues under ERISA's fiduciary
responsibility provisions.
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Several commenters were concerned that the exemption could be
interpreted to mean that only financial accounting firms or auditing
firms could conduct the fiduciary audit required under section I(g) of
the proposal. According to the commenters, other types of financial
service organizations may well be capable of conducting a fiduciary
audit. The Department did not intend to limit eligibility to serve as
independent auditors under the exemption solely to accounting or
auditing firms. Accordingly, any person who otherwise possesses the
requisite technical training and proficiency with ERISA's fiduciary
responsibility provisions may conduct a fiduciary audit.
A number of commenters also requested that we clarify the
requirement that the person performing the fiduciary audit must be
``independent''. In the Department's view, whether an auditor is
independent for purposes of the exemption would depend on the
particular facts and circumstances of each case. However, the
Department would not view an auditor as independent under circumstances
where the auditor has a financial interest, including an ownership
interest, in the INHAM , the employer, any parties dealing with the
plan under the exemption, or any affiliates thereof, or otherwise
receives more than a de minimis amount of its compensation from the
INHAM, the employer, its affiliates, or the plan.
One commenter questioned whether the auditor performing the
fiduciary audit can be an entity or individual who provides other
services to the plan, e.g., the firm that audits the plan in connection
with preparation of the plan's annual report (Form 5500). In the
Department's view, the provision of other services would not, in
itself, preclude a firm from meeting the requirement under the
exemption that the person performing the fiduciary audit must be
independent. However, the Department notes that the provision of other
services could raise questions regarding the independence of the
auditor if the aggregate services result in the auditor deriving more
than a de minimis amount of its compensation from the INHAM, the
employer, its affiliates, or the plan.
[[Page 15979]]
One of the commenters expressed concern about how the audit
requirement would apply to the condition, contained in section I(b),
that the transaction not be described in certain specified class
exemptions. The commenter suggested that the auditor's role regarding
this condition should be limited to a finding as to whether the
transaction is of the type described in the specified class exemptions,
rather than a finding regarding compliance with the terms and
conditions of such class exemptions. The Department concurs with this
comment. The Department believes, however, that it is the ongoing
responsibility of the INHAM to determine whether a transaction is
covered by one of the specified class exemptions or the INHAM
exemption.
A commenter suggested that the Department revise the requirement
under section I(g) of the proposal that the independent auditor must
have appropriate technical training and proficiency with ERISA's
fiduciary responsibility provisions. According to the commenter, the
most likely candidates to conduct an audit are people who have
experience with ERISA's fiduciary responsibility provisions rather than
technical training. On the basis of this comment, the Department has
determined to modify section I(g) to provide that the independent
auditor must have appropriate technical training or experience, and
proficiency with ERISA's fiduciary responsibility provisions. Another
commenter urged the Department to delete this requirement entirely. In
response to this comment, the Department believes that the requirement
that the auditor be familiar with ERISA's fiduciary responsibility
provisions provides an additional protection under the class exemption.
Therefore, the Department has determined not to further revise this
condition.
According to a commenter, the language in section IV(f)(4) of the
proposal, which provides that the auditor must make recommendations in
its written report, would require the auditor to go beyond its auditing
role of providing findings regarding compliance. The Department concurs
with this comment and, accordingly, has deleted the words ``and
recommendations'' from section IV(f). In response to a related comment,
the Department has deleted the words ``among other things'' from the
definition of fiduciary audit in order to clarify that the definition
sets out the specific steps for a fiduciary audit. The Department
cautions that the auditor would be responsible for taking any actions
necessary to adequately perform the steps described in the definition
of fiduciary audit.
A commenter suggested that the Department modify sections I(g) and
IV(f) by deleting the word ``fiduciary'' from ``fiduciary audit''
wherever it appears in those sections and substituting the word
``exemption'' to reflect the fact that the auditor's role is to assure
compliance with the policies and procedures established for purposes of
the exemption and does not otherwise involve examining for compliance
with ERISA's fiduciary responsibility provisions. The Department
concurs with the commenter's suggestion and has modified the exemption
accordingly.
The following examples illustrate the types of transactions which
would be covered by Part I of the exemption:
(1) Corporation C designates INHAM X to manage a portion of Plan
P's assets. Assume that X meets the criteria for an INHAM under the
exemption. X uses Plan P assets to purchase a building from Y, a
wholly-owned subsidiary of a broker-dealer that provides services to
the Plan. Absent this exemption, the purchase of the building from Y, a
party in interest described in ERISA section 3(14)(G), would violate
the restrictions contained in section 406(a)(1)(A), and the transaction
could not proceed until exempted by the Department. The general
exemption set forth in Part I would allow such transaction if the
conditions contained therein are met.
(2) INHAM X invests part of a pension fund's assets to acquire a
parcel of unimproved real property from the president of the employer
sponsoring the Plan. Part I does not provide an exemption for the
purchase of the property since relief is limited under that Part to
transactions with service providers and their affiliates. In addition,
no relief would be provided under the exemption for the act of self-
dealing described in section 406(b)(1) arising in connection with X's
use of the fund's assets in a transaction that benefits a person in
whom X has an interest that may affect the exercise of its best
judgement as a fiduciary.
(3) Corporation C is the named fiduciary of Plan P. C chooses INHAM
X to manage the portion of P's assets allocated for real estate
investments. X, using its discretionary authority, locates and
negotiates the purchase for $6 million of a commercial building in New
York that is being offered for sale by Corporation Z. Z provides
accounting services to Plan P. Pursuant to its arrangement with C, X is
required to seek the approval of C for all real estate transactions
involving amounts of $5 million or more. On the basis of X's
recommendation, C approves the transaction. Despite the retention of
approval power by C, Part I of the exemption would be available for the
purchase of the building provided there is no arrangement with C that
requires X to buy the building from Z and the conditions of Part I are
otherwise met.
(4) Corporation C allocates part of the assets of its Plan P to a
master trust managed by INHAM X. X uses master trust assets to purchase
an office building that is subsequently leased to M. M provides
administrative services to Plan P. During the term of the lease, M
becomes a wholly-owned subsidiary of Corporation C. Although M is no
longer a party in interest with respect to Plan P solely by reason of
providing services to such Plan, Part I will continue to be available
for the entire lease term since, at the time the transaction was
entered into (as defined in section IV(e)), M was not affiliated with
the plan sponsor and its relationship to Plan P was solely that of a
service provider.
(5) INHAM X retains Broker-Dealer B to provide brokerage services
to Plan P. In a separate transaction, X uses Plan P assets to purchase
corporate bonds directly from B. The bonds were originally issued by
Corporation Z, an investment manager for a portion of the Plan's assets
that are not controlled by INHAM X. Since the Department expects that,
as part of its fiduciary responsibilities, the INHAM would have
analyzed the terms of the bonds prior to purchase, the relief provided
by Part I could extend to both the acquisition of the bonds and the
underlying extension of credit. Thus, Part I could cover a subsidiary
transaction with a party in interest if such transaction is itself
subject to relief under the exemption and the applicable conditions are
otherwise met.
(6) Corporation C designates INHAM X to manage a portion of Plan
P's assets. X uses plan assets to purchase an office building that is
subsequently leased to Broker-Dealer BD, a non-party in interest with
respect to Plan P. During the term of the lease, BD becomes a service
provider to Plan P. Although BD was not a party in interest service
provider at the time the lease was executed, section IV(e) provides
that Part I of the exemption would be available for the entire lease
term provided that the remaining conditions of the exemption were met
at the time the transaction was entered into. Alternatively, section
IV(e) provides that Part I of the exemption would be available to
exempt the transaction if
[[Page 15980]]
the conditions of the exemption were met as of the time the transaction
would have become prohibited.
B. Specific Exemptions for Employers
A commenter urged the Department to expand the relief provided
under Part II of the proposal to permit an INHAM to select an affiliate
to provide telecommunications related goods and services to any real
property that may be considered an asset of the plan or to an entity in
which the plan owns a controlling interest and that is managed by an
INHAM. While the commenter has identified the need for exemptive
relief, the Department does not believe that it has sufficient
information on the record at this time to provide additional relief for
a class of transactions that would otherwise violate section 406(b) of
ERISA. Finally, the Department believes that adoption of the
commenter's suggestion would arbitrarily favor one specific industry
over another under similar circumstances.
C. Definitions
1. INHAM (Section IV(a)). A commenter requested that the definition
of an INHAM be revised to include a division or group within the
employer's management structure. The Department believes that an INHAM
that is organized as a separate legal entity, is separately managed,
and is subject to oversight by the Securities and Exchange Commission
as a result of registration as an investment adviser under the
Investment Advisers Act of 1940 provides an important safeguard under
the exemption. Therefore, the Department cannot conclude that further
relief is warranted.
Another commenter suggested that the Department modify the
definition of INHAM to permit a majority-owned subsidiary of an
employer, or a direct or indirect majority-owned subsidiary of a parent
organization of such an employer to serve as an INHAM. The Department
does not believe that a sufficient showing has been made that the
requirement that the INHAM be wholly-owned under the proposal would
raise compliance problems for those persons intending to use the
exemption. Accordingly, the Department has determined not to revise the
final exemption as requested.
Several commenters urged the Department to expand the definition of
an INHAM to include an entity established by a multiemployer plan or
its plan sponsor. A commenter further noted that the definition of an
affiliate of the INHAM contained in sections IV(a) and IV(b) of the
proposal should be broadened to include families of multiemployer
plans. The Department notes that the exemption application requested
relief for transactions involving the assets of single employer plans
managed by in-house managers. Accordingly, the Department does not
believe that it has sufficient information regarding the operation and
management of multiemployer plans to make the findings necessary to
grant exemptive relief. Moreover, the Department does not believe that
a sufficient showing has been made by the commenters that the
conditions contained in the exemption would adequately protect the
interests of participants and beneficiaries of internally managed
multiemployer plans. Of course, the Department would be prepared to
consider additional relief upon proper demonstration that the findings
can be made under section 408(a) of ERISA with respect to such plans.
A commenter requested that the Department clarify that the relief
provided for employee benefit plans whose assets are managed by INHAMs
extends, not only to plans sponsored by affiliates of the INHAM, but
also includes plans sponsored by the INHAM itself. According to the
commenter, the INHAM may establish a stand-alone plan to cover its
employees, or its employees may participate in a plan established and
maintained by an affiliate of the INHAM. Therefore, the commenter urged
that the Department adopt a definition of ``plan'', which would include
plans maintained by the INHAM or an affiliate of the INHAM. In
consideration of the concerns raised by the commenter, the Department
has determined to adopt a definition of plan under section IV(h) that
includes plans maintained by the INHAM and affiliates of the INHAM. The
commenter further requested that the requirements under section IV(a)
that the INHAM have $50 million of plan assets under management and
control, and that plans maintained by affiliates of the INHAM have $250
million of aggregate plan assets also should be modified to clarify
that these requirements are not intended to exclude any plan maintained
by the INHAM. The requirement that the INHAM be affiliated with a plan
sponsor (or group of related plan sponsors) whose plan(s) hold in the
aggregate assets of at least $250 million, $50 million of which is
under the direct management and control of the INHAM was imposed
because the Department believes that INHAMs of large plans are more
likely to have an appropriate level of expertise in financial and
business matters. In this regard, the Department believes that the
requirement that the INHAM have a significant dollar amount of assets
under its management and control attributable to plans maintained by
affiliates which are separately accountable for the operation of their
respective plans provides an additional safeguard under the exemption.
Accordingly, the Department has determined not to revise the $50
million requirement. However, the Department has determined that it
would be appropriate to include the assets of plans maintained by the
INHAM in determining compliance with the $250 million standard.
Finally, a commenter requested that the $50 million requirement be
revised to permit the $50 million threshold to be met during the
INHAM's first fiscal year as a separate legal entity. According to the
commenter, the requirement that the INHAM have in excess of $50 million
of plan assets under its management and control as of the last day of
its most recent fiscal year could unintentionally prevent the exemption
from being immediately available for an employer's in-house management
group in its first year as a separate wholly-owned subsidiary of the
employer. In response to this comment, the Department has revised
section IV(a)(2) to specify that an existing asset management group
that is newly-incorporated as a separate subsidiary of the employer may
satisfy the $50 million requirement in its initial fiscal year if the
requirement is met as of the date during its initial fiscal year as a
separate legal entity that responsibility for the management of such
assets in excess of $50 million was transferred to it from the
employer.
2. Continuing Transactions (Section IV(e)). A commenter asserted
that the last sentence of section IV(e), which deals with transactions
which are continuing in nature, is unclear. This sentence addresses the
issue of whether a continuing transaction that is not prohibited and,
therefore, not subject to the exemption at the outset, may become
covered by the exemption during the course of the transaction if it
later becomes prohibited. According to the commenter, certain of the
conditions of the exemption can be met only at the time the transaction
is entered into, such as the condition in section I(d) dealing with
arms-length terms. Conversely, the requirements of section I(e)(1)
dealing with the party in interest relationships permitted under the
exemption can only be determined at the time the transaction would have
become prohibited. It is the view of the
[[Page 15981]]
Department that section I(d) will be deemed satisfied in the case of a
continuing transaction that later becomes prohibited if the transaction
negotiated by the INHAM satisfied such section at the time the
transaction was entered into. The Department notes that it does not
interpret section IV(e) as exempting a continuing transaction that
becomes prohibited subsequent to a renewal or modification that
required the consent of the INHAM, unless the renewal or modification
otherwise met the arm's-length requirement of section I(d). Lastly, the
Department has modified section IV(e) to clarify that in determining
compliance with the conditions of the exemption at the time that the
transaction was entered into, section I(e) will be deemed satisfied if
the transaction was entered into between a plan and a person who was
not then a party in interest.
D. Miscellaneous
1. In response to a comment, the Department has added section
IV(d)(3) to the exemption in order to define ``control'' for purposes
of determining whether or not an INHAM is ``related'' to a party in
interest under section IV(d).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties respecting the plan solely in the interests of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of plans and of their participants and beneficiaries and
protective of the rights of participants and beneficiaries;
(3) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act and the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(4) The exemption is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the class
exemption.
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(55 FR 32836, August 10, 1990).
Part I--Basic Exemption
Effective April 10, 1996, the restrictions of section 406(a)(1) (A)
through (D) of the Act and the taxes imposed by Code section 4975 (a)
and (b) of the Code, by reason of 4975(c)(1) (A) through (D), shall not
apply to a transaction between a party in interest with respect to a
plan (as defined in section IV(h)) and such plan, provided that an in-
house asset manager (INHAM) (as defined in section IV(a)) has
discretionary authority or control with respect to the plan assets
involved in the transaction and the following conditions are satisfied:
(a) The terms of the transaction are negotiated on behalf of the
plan by, or under the authority and general direction of, the INHAM,
and either the INHAM, or (so long as the INHAM retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by the INHAM, makes the decision on behalf of the plan to
enter into the transaction. Notwithstanding the foregoing, a
transaction involving an amount of $5,000,000 or more, which has been
negotiated on behalf of the plan by the INHAM will not fail to meet the
requirements of this section I(a) solely because the plan sponsor or
its designee retains the right to veto or approve such transaction;
(b) The transaction is not described in--
(1) Prohibited Transaction Exemption 81-6 (46 FR 7527; January 23,
1981) (relating to securities lending arrangements),
(2) Prohibited Transaction Exemption 83-1 (48 FR 895; January 7,
1983) (relating to acquisitions by plans of interests in mortgage
pools), or
(3) Prohibited Transaction Exemption 88-59 (53 FR 24811; June 30,
1988) (relating to certain mortgage financing arrangements);
(c) The transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest;
(d) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the INHAM, the terms of the transaction are at least as
favorable to the plan as the terms generally available in arm's length
transactions between unrelated parties;
(e) The party in interest dealing with the plan: (1) is a party in
interest with respect to the plan (including a fiduciary) solely by
reason of providing services to the plan, or solely by reason of a
relationship to a service provider described in section 3(14) (F), (G),
(H), or (I) of ERISA; and (2) does not have discretionary authority or
control with respect to the investment of the plan assets involved in
the transaction and does not render investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets;
(f) The party in interest dealing with the plan is neither the
INHAM nor a person related to the INHAM (within the meaning of section
IV(d));
(g) The INHAM adopts written policies and procedures that are
designed to assure compliance with the conditions of the exemption; and
(h) An independent auditor, who has appropriate technical training
or experience and proficiency with ERISA's fiduciary responsibility
provisions and so represents in writing, conducts an exemption audit
(as defined in section IV(f)) on an annual basis. Following completion
of the exemption audit, the auditor shall issue a written report to the
plan presenting its specific findings regarding the level of compliance
with the policies and procedure adopted by the INHAM in accordance with
section I(g).
Part II--Specific Exemptions
Effective April 10, 1996, the restrictions of sections 406(a),
406(b)(1), 406(b)(2) and 407(a) of the Act and the taxes imposed by
section 4975 (a) and (b) of the Code, by reason of Code section
4975(c)(1) (A) through (E), shall not apply to:
(a) The leasing of office or commercial space owned by a plan
managed by an INHAM to an employer any of whose employees are covered
by the plan or an affiliate of such an employer (as defined in section
407(d)(7) of the Act), if--
[[Page 15982]]
(1) The plan acquires the office or commercial space subject to an
existing lease with an employer, or its affiliate as a result of
foreclosure on a mortgage or deed of trust;
(2) The INHAM makes the decision on behalf of the plan to foreclose
on the mortgage or deed of trust as part of the exercise of its
discretionary authority;
(3) The exemption provided for transactions engaged in with a plan
pursuant to section II(a) is effective until the later of the
expiration of the lease term or any renewal thereof which does not
require the consent of the plan lessor;
(4) The amount of space covered by the lease does not exceed
fifteen (15) percent of the rentable space of the office building or
the commercial center; and
(5) The requirements of sections I(c), I(g) and I(h) are satisfied
with respect to the transaction.
(b) The leasing of residential space by a plan to a party in
interest if--
(1) The party in interest leasing space from the plan is an
employee of an employer any of whose employees are covered by the plan
or an employee of an affiliate of such employer (as defined in section
407(d)(7) of the Act);
(2) The employee who is leasing space does not have any
discretionary authority or control with respect to the investment of
the assets involved in the lease transaction and does not render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
(3) The employee who is leasing space is not an officer, director,
or a 10% or more shareholder of the employer or an affiliate of such
employer;
(4) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of the INHAM, the terms of the transaction are not less
favorable to the plan than the terms afforded by the plan to other,
unrelated lessees in comparable arm's length transactions;
(5) The amount of space covered by the lease does not exceed five
percent (5%) of the rentable space of the apartment building or multi-
unit residential subdivision [townhouses or garden apartments], and the
aggregate amount of space leased to all employees of the employer or an
affiliate of such employer does not exceed ten percent (10%) of such
rentable space; and
(6) The requirements of sections I(a), I(c), I(d), I(g) and I(h)
are satisfied with respect to the transaction.
Part III--Places of Public Accommodation
Effective April 10, 1996, the restrictions of sections 406(a)(1)
(A) through (D) and 406(b) (1) and (2) of ERISA and the taxes imposed
by Code section 4975 (a) and (b), by reason of Code section 4975(c)(1)
(A) through (E), shall not apply to the furnishing of services and
facilities (and goods incidental thereto) by a place of public
accommodation owned by a plan and managed by an INHAM to a party in
interest with respect to the plan, if the services and facilities (and
incidental goods) are furnished on a comparable basis to the general
public.
Part IV--Definitions
For the purposes of this exemption:
(a) The term ``in-house asset manager'' or ``INHAM'' means an
organization which is--
(1) either (A) a direct or indirect wholly-owned subsidiary of an
employer, or a direct or indirect wholly-owned subsidiary of a parent
organization of such an employer, or (B) a membership nonprofit
corporation a majority of whose members are officers or directors of
such an employer or parent organization; and
(2) an investment adviser registered under the Investment Advisers
Act of 1940 that, as of the last day of its most recent fiscal year,
has under its management and control total assets attributable to plans
maintained by affiliates of the INHAM (as defined in section IV(b)) in
excess of $50 million; provided that if it has no prior fiscal year as
a separate legal entity as a result of it constituting a division or
group within the employer's organizational structure, then this
requirement will be deemed met as of the date during its initial fiscal
year as a separate legal entity that responsibility for the management
of such assets in excess of $50 million was transferred to it from the
employer.
In addition, plans maintained by affiliates of the INHAM and/or the
INHAM, must have, as of the last day of each plan's reporting year,
aggregate assets of at least $250 million.
(b) For purposes of sections IV(a) and IV(h), an ``affiliate'' of
an INHAM means a member of either (1) a controlled group of
corporations (as defined in section 414(b) of the Code) of which the
INHAM is a member, or (2) a group of trades or businesses under common
control (as defined in section 414(c) of the Code) of which the INHAM
is a member; provided that ``50 percent'' shall be substituted for ``80
percent'' wherever ``80 percent'' appears in section 414(b) or 414(c)
or the rules thereunder.
(c) The term ``party in interest'' means a person described in Act
section 3(14) and includes a ``disqualified person'' as defined in Code
section 4975(e)(2).
(d) An INHAM is ``related'' to a party in interest for purposes of
section I(f) of this exemption if the party in interest (or a person
controlling, or controlled by, the party in interest) owns a five
percent or more interest in the INHAM or if the INHAM (or a person
controlling, or controlled by, the INHAM) owns a five percent or more
interest in the party in interest. For purposes of this definition:
(1) The term ``interest'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation.
(B) The capital interest or the profits interest of the entity if
the entity is a partnership, or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise;
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest; and
(3) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) For purposes of this exemption, the time as of which any
transaction occurs is the date upon which the transaction is entered
into. In addition, in the case of a transaction that is continuing, the
transaction shall be deemed to occur until it is terminated. If any
transaction is entered into on or after April 10, 1996, or any renewal
that requires the consent of the INHAM occurs on or after April 10,
1996, and the requirements of this exemption are satisfied at the time
the transaction is entered into or renewed, respectively, the
requirements will continue to be satisfied thereafter with respect to
the transaction. Nothing in this paragraph shall be construed as
exempting a transaction entered into by a plan which becomes a
transaction described in section 406 of the Act or section 4975 of the
Code while the transaction is continuing, unless the conditions of the
exemption were met either at the time the transaction was entered into
or at the time the transaction would have
[[Page 15983]]
become prohibited but for this exemption. In determining compliance
with the conditions of the exemption at the time that the transaction
was entered into for purposes of the preceding sentence, section I(e)
will be deemed satisfied if the transaction was entered into between a
plan and a person who was not then a party in interest.
(f) Exemption Audit. An ``exemption audit'' of a plan must consist
of the following:
(1) A review of the written policies and procedures adopted by the
INHAM pursuant to section I(g) for consistency with each of the
objective requirements of this exemption (as described in section
IV(g)).
(2) A test of a representative sample of the plan's transactions in
order to make findings regarding whether the INHAM is in compliance
with (i) the written policies and procedures adopted by the INHAM
pursuant to section I(g) of the exemption and (ii) the objective
requirements of the exemption.
(3) A determination as to whether the INHAM has satisfied the
definition of an INHAM under the exemption; and
(4) Issuance of a written report describing the steps performed by
the auditor during the course of its review and the auditor's findings.
(g) For purposes of section IV(f), the written policies and
procedures must describe the following objective requirements of the
exemption and the steps adopted by the INHAM to assure compliance with
each of these requirements:
(1) The definition of an INHAM in section IV(a).
(2) The requirements of Part I and section I(a) regarding the
discretionary authority or control of the INHAM with respect to the
plan assets involved in the transaction, in negotiating the terms of
the transaction, and with regard to the decision on behalf of the plan
to enter into the transaction.
(3) That any procedure for approval or veto of the transaction
meets the requirements of section I(a).
(4) For a transaction described in Part I:
(A) that the transaction is not entered into with any person who is
excluded from relief under section I(e)(1), section I(e)(2), to the
extent such person has discretionary authority or control over the plan
assets involved in the transaction, or section I(f), and
(B) that the transaction is not described in any of the class
exemptions listed in section I(b).
(5) For a transaction described in Part II:
(A) If the transaction is described in section II(a),
(i) that the transaction is with a party described in section
II(a);
(ii) that the transaction occurs under the circumstances described
in section II(a) (1) and (2);
(iii) that the transaction does not extend beyond the period of
time described in section II(a)(3); and
(iv) that the percentage test in section II(a)(4) has been
satisfied or
(B) If the transaction is described in section II(b),
(i) that the transaction is with a party described in sections
II(b)(1);
(ii) that the transaction is not entered into with any person
excluded from relief under section II(b)(2) to the extent such person
has discretionary authority or control over the plan assets involved in
the lease transaction or section II(b)(3); and
(iii) that the percentage test in section II(b)(5) has been
satisfied.
(h) The term ``plan'' means a plan maintained by the INHAM or an
affiliate of the INHAM.
Signed at Washington, DC, 4th day of April 1996.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 96-8841 Filed 4-9-96; 8:45 am]
BILLING CODE 4510-29-P